The world’s largest, most sophisticated investors are turning to gold…

These fundamentals are leading to broad based global demand for gold – from retail investors to institutions and pension funds. Japanese pension funds are increasingly looking at gold according to an article in the Wall Street Journal this morning.

Diversification into gold is taking place in order to protect against sovereign risk, debasement of currency risk and inflation risk.

In March 2012, Okayama Metal & Machinery became the first Japanese pension fund to make public purchases of gold, in a sign of dwindling faith in paper currencies. Okayama manages pension funds for about 260 small and mid-sized companies in the Okayama area.

“By diversifying currencies, we aim to reduce risks associated with them,” said Yoshi Kiguchi, the fund’s chief investment officer. “Yields become stable if you put small amounts into as many types of holdings as possible.”

Of its 40 billion yen ($477 million) in assets, the fund has invested around ¥500 million-¥600 million in gold, he said.

Initially, the fund aims to keep about 1.5% of its total assets of Y40bn ($500m) in bullion-backed exchange traded funds, according to chief investment officer Yoshisuke Kiguchi, who said he was diversifying into gold to “escape sovereign risk”.

Other pension funds in Japan are following their lead according to the Wall Street Journal.

Japanese pension funds are diversifying into gold “largely to mitigate the damage from possible market shocks”.

Japanese pension funds invest mainly in domestic stocks and bonds. Until recently, none have looked to gold or other physical assets.

Gold, whose price movement isn’t historically correlated with those of stocks or bonds, can protect portfolios from being damaged too badly in times of market stress, investment managers say. Low interest rates also justify holding non-yielding gold in place of cash.

Gold is also used as a hedge against inflation, which is becoming a bigger concern as global central banks buy ever-more bonds, market watchers say.

Even a small allocation by pension funds internationally to gold would result in a significant new source of demand which could be a new fundamental factor which propels prices higher in the coming years.

JR Nyquist is a long-time respected observer of world affairs from an economic and financial standpoint. He has been writing on such subjects for some 15 years.

This week he has penned an informative analysis of various crises that are simmering around the world which could have a profound impact on the world economy and financial markets.

Paper assets provide virtually no protection from these exogenous factors. Gold is the crisis commodity that has historically protected wealth in such scenarios. But it is important that investors stay informed of these factors, which the mainstream media largely ignores…

Many observers thought that the economic and financial trouble in Europe was a thing of the past.

But just as we have learned so many times, this is the slow-burn crisis that always seems to come back. European policymakers can come up with band-aid bailouts, but those don’t solve the underlying, fundamental problems that exist in Europe. The European economy is in a depression, much of the European Union is in deep, unsustainable and, in some cases, unservicable debt. Bailouts won’t fix the breakdown and Wall Street knows that the trouble isn’t going away any time soon. In fact, the reason Wall Street sold off sharply today is that they know that in today’s interconnected world in which money flows at the speed of light, the crisis in Europe will be exceedingly difficult to contain.

As a result, with bad news coming from Spain today, the US stock market sold off sharply across the board.

The Dow fell 112 points, or 0.86%, to 12832, the S&P 500 dipped 11.9 points, or 0.87%, to 1365 and the Nasdaq Composite slumped 33.7 points, or 1.1%, to 2932. The US indexes were just following the example set overnight in Asia and Europe, where stock markets took even steeper dives. The Euro Stoxx 50 sunk 2.8% to 2237, the English FTSE 100 dipped 1.1% to 5652 and the German DAX slumped 1.9% to 6730. The Japanese Nikkei 225 sold off by 1.4% to 8670.

Readers may recall that early on in the European crisis bad news in Europe usually meant lower gold prices as investors liquidated gold to cover losses in other assets. Those days appear to have passed. While world stock markets were tumbling, gold was up over $2 per ounce, demonstrating gold’s role as an excellent diversifying asset for a balanced portfolio.

02/22/12 St. Louis, Missouri – Well, the crazy things that have been going on with Japanese yen (JPY) finally seem to be unwinding… For anyone new to class, the Japanese yen has been one of the best-performing currencies the past couple of years, and not for strong fundamentals… The economy has been in a funk for over two decades, interest rates have been zero for so long now — I don’t remember when they weren’t zero — an aging population and government debt up to their eyeballs, but still the yen rallied…

But that appears to be over, giving credence that the only reason yen was so strong for so long was that it was still considered to be a “safe haven” currency. Well, with the latest agreement in the eurozone, I’m sure a lot of those “safe haven” trades into yen are being unwound, from the looks of it, I should say. So for the first time since July of last year, yen is trading with an 80 handle…

The euro (EUR) remains above 1.32 this morning… but has found the waters quite rough as it attempts a run at 1.33, and just like a couple of weeks ago, when we saw the euro bounce around 1.32-1.33 and never really climb past 1.33, the markets will grow tired of this trade, and soon the euro will begin to slide again. That is, unless it can get some strong legs and move past 1.33. Personally, I would be happy to see the euro remain around 1.32, for now, and see where the baby steps of stabilization for the eurozone go from here…

In the 1980s here in St. Louis, the world-famous rock radio station, KSHE, used to run a TV ad that had a father break into air guitar when the Stones’ song “Brown Sugar” would come on, and the daughter would get all freaked out and say, “Mom… he’s doing it again.”

Well, I told you all that to set up… “Pfennig readers, China’s doing it again.” China announced last night that they had signed a new member to their club of countries that have currency swap agreements to remove dollars from the terms of trade. This time, China signed an agreement with Turkey. Yes, China is being coy with these smaller — in terms of world trade — countries, but that’s how they are going to spread their wings, and gain a wider distribution of their currency. And again, I sit here and tell you, dear reader, that China has plans to remove the dollar as the reserve currency of the world.

And maybe it won’t be the renminbi (CNY) that takes over… maybe the so-called reserve currency is a basket of major currencies. The point here, and I can’t emphasize this enough, is that to have the reserve currency title stripped from the dollar would be devastating to our economy… To you, me, our kids, our grandkids… Think about this, dear reader… after World War II, the pound sterling (GBP) could no longer be the reserve currency of the world. Because of the debts the U.K. built fighting the war, the U.S. became the financier of the world, and was the only country that had the ability to act as “settlement banks” and use dollars in the terms of trade…

Then gloom, despair and agony fell on the U.K. economy. So this is what the Chinese have in mind for us… and why are they doing this? They believe that the U.S. has broken their promise to the world to keep the dollar strong, which they can no longer do, given the debts, deficits, economy, scandals, unfunded liabilities and on and on…

OK, I’ve got to go on, because this is really depressing me this morning!

This morning, the euro was dealt a bit of a blow by a worse-than-expected manufacturing index report for this month… remember, these manufacturing index reports are called “PMI.” So the eurozone PMI came in at less than 50, at 49.7. In addition, remember that any number below 50 represents contraction of the manufacturing sector. I find this report to be interesting, given that there appears to be a strong economy in Germany. But even with Germany representing the largest economy of the eurozone, there are many more countries in the eurozone that are not experiencing economic strength.

In the U.K., the latest Bank of England (BOE) meeting minutes showed that two members voted for additional bond purchases greater than what was implemented. I’m surprised at how the markets slammed the pound after the printing of this report… Silly markets… fickle markets… It’s just two votes… But the real point here is that we have to keep our eye on the ball, as I’ve explained several times over the past few years, and that is that what happens in the U.K. ends up on our shores about six months later… The BOE implemented another round of QE last month, so the clock has started…

The Aussie dollar (AUD) is still gasping for air, after having the wind knocked out of it by the RBA meeting minutes… We talked about this yesterday, but for those that missed class yesterday, the RBA added some wording in their latest meeting minutes that surprised the markets. The RBA kept their foot in the door of more rate cuts. Of course, they didn’t say they would cut rates, they simply said they “had the scope to do so, should the economy weaken”…

So as I said yesterday, we saw this same type of trading after a RBA rumor about three months ago, and it took the A$ a few days to get its wind back. I think it may get its wind back when the markets get a drift of the latest Wage Cost Index for the fourth quarter, which printed stronger than expected!

As I look at the currency screens this morning, most of the currencies are moving in the wrong direction, but not by much, just an underlying bias to buy dollars this morning. And gold, which had a very strong performance yesterday, is off about $5 this morning, as it appears some profit taking has taken over.

The price of oil didn’t take a step back, though. The oil price is up another $1, to $105, and knocking on the door to $106… I stopped to fill up my gas tank this morning… and much as the way groceries, restaurants and so on are doing… I got less and paid the same… This way, most of us don’t really feel the inflation all around us, but it’s there… trust me. No wage inflation or home inflation, but everything else that touches our lives… and as long as everything else around us is going up in price or going down in the quantity at the same price (it’s the same thing), it would be OK to see some wage inflation, eh?

China also printed a weaker manufacturing index (PMI). The preliminary report from HSBC Holdings shows that China’s PMI was 49.7, again below 50. This is all a part of the “moderation” of the Chinese economy, folks… nothing to be really concerned about yet, so move along, these are not the droids you are looking for…

Well, it looks as if the U.S. isn’t the only country that didn’t experience a grand Christmas shopping season. Retail Sales in Canada too, came in much weaker than previous months… December Retail sales for Canada slipped 0.2%, following increases of 0.4% in November and 0.8% in October! So maybe everyone shopped early? December was the first drop in five months for Canada, and a look under the hood (pun intended) showed that motor vehicles were to blame for the drop. So let’s not write the Canadian economy off just yet…

One European currency, the krone, (NOK) that’s bucking the trend of following the euro today, and in my opinion, it’s about darn time! The Norwegian krone is rallying nicely this morning. You might recall me bemoaning the fact that the krone was following the euro, even though Norway had sterling fundamentals and should be held to a different standard. Well, maybe that’s happening, finally! The krone is the best-performing major currency this month!

After cutting rates in December, the Norwegian central bank, the Norges Bank, might just be sitting on its hands going forward, as speculation of another rate cut fades… All this fading speculation is really pushing the krone… I wonder how long this will last? Does it have legs? Is it on terra firma? I guess we’ll have to wait and see, but in my opinion, it should be OK! Of course, just because I say that, I need to make sure you understand that it’s just my opinion, and I could be wrong!

I saw a cartoon on Ed Steer’s excellent morning Gold & Silver Daily this morning… It shows the president holding a dollar bill that’s on fire, and he says, “Look, Green Energy!” If it weren’t so true, it might be funny, eh?

Not much in the way of data from the data cupboard this morning here in the U.S., just existing home sales for January… The thing to look for here is not the homes sold, but at what price? Did the median price decline as it has for a couple of years now? That’s what to look for…

Then there was this from The Economist:

“The European Union has lower government debt levels than America. Gross government debt in the 27 nations of the EU was 80% of the region’s GDP at the end of 2010; in America, gross federal debt at the end of 2010 was 94% of GDP. Furthermore, government debt is growing more slowly as a percentage of GDP in the EU than in America, because pretty much every nation in the EU is implementing austerity measures. The general government deficit in the EU-27 in 2010 was 6.6% of GDP. In America, the federal deficit in 2010 was 9% of GDP.”

I tell you this not as a “hey, they’re better than us” type of thing. This article caught my eye, because we’re going to hear over and over again during the election campaign that we are “becoming Europe” because of the debt. But if that were true, then we as a country would be cutting deficit spending, and implementing austerity measures… watch out for that!

To recap… Yen finally surrenders to intervention and reduction of safe-haven flows. China signs another member to their currency swap club. Oil climbs further. Gold has strong performance yesterday followed by some profit taking today. The A$ is still searching for some wind, after having it knocked out of it by the RBA minutes on Monday, and maybe, just maybe, Norway is breaking the trend to follow the euro…

By John Waggoner, USA TODAY

Japan has suffered more than two decades of subpar economic growth, made all the more miserable by falling consumer prices, a stagnant real estate market and a moribund stock market. The worry: that the U.S. economy devolves into something like Japan’s.

Some of the similarities between Japan’s economic woes and the U.S.’ are striking. Both countries have aging populations. Both have ultra-low interest rates, which don’t seem to be having much effect in stimulating the economy. And both countries are struggling with high debt loads.

Could the U.S. be entering a multi-decade recession like Japan’s? Probably not, experts say: Japan’s main problem was reacting too slowly to its problems, and the U.S. has reacted fairly swiftly to the economic crisis. Nevertheless, some of the problems the U.S. faces now could take another two to five years to fix — and investors could learn a thing or two from the Japanese experience if hard times drag on.

The U.S. recession officially began in December 2007 and ended in June 2009, according to the National Bureau of Economic Research. To most people, though, it still feels like a recession. Unemployment stands at 9.1%, according to the Bureau of Labor Statistics, and gross domestic product grew at a tepid 1.3% in the second quarter and is estimated to have grown at an annual rate of 2.5% from the second quarter to the third.

Miserable as current conditions are, they pale in comparison with Japan’s problems. “It’s not the lost decade — it’s the lost two decades,” says Bill Kennedy, portfolio manager for Fidelity International Discovery fund. Japan’s period of malaise began in 1990, and the country is still struggling today.

How bad is it? The Nikkei stock index is down 80% from its 1989 peak. Property prices fell more than 80%.

Could the U.S. see a period like Japan’s? “It’s an increasing possibility,” says Ryan Brecht, senior economist at Action Economics. Some of the similarities are striking.

For example, Japan’s woes started with an overheated real estate market and frenzied borrowing — two problems that will sound familiar to anyone in the U.S. Home prices in the U.S. have fallen more than 30% since 2006, according to Standard and Poor’s. The Japanese real estate market has yet to fully recover from its 1980s excesses.

Both the U.S. and Japan have seen heavy losses in their stock markets. The Wilshire 5000, a broad measure of the U.S. stock market, is down 18% from its 2007 high. Both countries suffer from high debt: Consumer debt in the U.S., and corporate debt in Japan. And the aging populations in both countries mean fewer younger workers will have to support more retirees.

The Japanese made matters worse in three ways:

• Japanese banks were slow to write down bad debt. “They took 10 years to recognize the non-performing loans,” Kennedy says. “They kicked the can down the road.”

Japan’s corporations gradually paid down their debt, but during that time, they weren’t making investments, says Kenichi Amaki, portfolio manager for the Matthews Asia funds. Because the companies weren’t investing in factories and employment, economic growth remained anemic.

• After the initial meltdown in 1990, the Japanese central bank kept rates too high for too long. Japan’s short-term prime lending rate was 6.88% in 1991 and 3.91% in 1992, even though property values plunged 5.11% in 1992. Japan didn’t drop rates to nearly zero until 1995.

• Worried by threats of a credit downgrade because of the country’s high level of debt, Japan raised its consumption tax in 1997, which slowed the economy just as it was beginning to recover. “It’s fair to say that the Japanese repeated what we did in 1937 — raised taxes too soon,” says John Silvia, chief economist for Wells Fargo bank.

Japan now has persistent deflation — a period of falling prices. Part of that is because China can supply low-priced, quality goods. “Even though Japan is cutting supply, for every one unit that Japan cuts, China is there with three more units,” Amaki says. Also, Japanese consumers have a deflationary mentality: If you wait long enough, prices will fall.

Japan’s declining population plays a role, too. The median age in Japan — half are younger, half are older — is 44.8 years, according to the Central Intelligence Agency. In the U.S., it’s 36.9 years. In both the U.S. and Japan, the median age is creeping higher, meaning there are fewer young people to contribute to pensions and health care. But the U.S. population continues to grow, which eventually translates into GDP growth.

Finally, Japan has been hit with bad luck. “The balance-sheet recession ended in 2006,” Amaki says. “Companies became more willing to take on debt to finance growth.” The 2008 financial crisis soon put an end to that, and the 2011 earthquake, tsunami and nuclear power station meltdown put a big cramp in Japan’s GDP.

Why it’s different in U.S.

Economists say that the U.S. may avoid a Japan-like period of malaise. The Federal Reserve was very quick to react to the 2008 financial crisis, pushing interest rates down to near zero.

U.S. consumers are paying down their debt and saving more, Amaki says. Although that’s a slow process, consumers have come to realize that paying off a debt is like getting a raise: It increases your disposable income. Eventually, that will translate into more spending. “The American consumer won’t change,” Silvia says.

What could go wrong? Plenty. “When I look at the argument between political parties about whether to rein in spending or raise taxes, it reminds me of what happened in Japan,” says Amaki, referring to Japan’s increase in consumption taxes. In the short term, he says, raising taxes or slamming on the brakes in spending would be “a terrible idea.”

Similarly, a rate increase could weaken economic growth further, Silvia says. “Housing starts are continuing to struggle with mortgage rates at 4%,” he says. Raising rates would make the struggle even worse.

Lessons for U.S. investors

For investors, the specter of a long period of malaise means a long period of low returns. Nevertheless, despite the chronically bad market, some Japanese stocks fared well. What investors can learn from Japan:

•Profits. “Stock prices follow earnings,” Kennedy says. Although the broad market fared poorly in Japan, some industries fared better than others. Japanese financial services companies, for example, were a disaster. “It’s appalling how much wealth destruction they caused,” Kennedy says. Not surprisingly, Japanese bank earnings have been poor.

But some Japanese industries did well. Autos, for example, prospered until competition from South Korea cut into sales. (The rising value of the Japanese yen also made Japan’s autos more expensive abroad.) Japanese factory automation is now doing well, although it, too, may be threatened by competition from China.

•Price cutting. In a deflationary period, people love bargains. Companies that can undercut competitors with quality items flourish in a deflationary environment. So it’s no surprise that domestic Japanese stores that cater to bargain-hunters fared well. “Any area where the consumer feels like he or she is getting a good deal,” Kennedy says.

One example — not in Kennedy’s portfolio, according to Morningstar — is Don Quijote, a discount store that has grown to 150 stores since 1980. The company offers an eclectic mix of bargain products and amusements, including a yet-unfinished roller-coaster in downtown Tokyo.

•Flexibility. The downfall of many Japanese companies was that they didn’t react quickly enough to change. Japan’s automakers, for example, have struggled against their Korean competition, as have electronics manufacturers. “The big difference between U.S. and Japanese companies is the ability to reinvent themselves,” Kennedy says.

In the U.S., the low value of the dollar has given manufacturers a boost: U.S. goods sold abroad are now cheaper because of the swooning greenback. And, while the U.S. manufacturing sector is always described as shrinking, that’s because U.S. factories are highly efficient. The U.S. manufacturing sector remains the largest in the world.

If you’re betting on a long, subpar period — and many investors, such as Bill Gross of Pimco are doing just that — then you can learn some lessons from Japan. Look for domestic companies with rising earnings and an ability to cut prices.

And be careful what you wish for, Amaki says. “When I see the arguments between political parties about raising taxes or cutting spending, I think of what happened in Japan in 1997,” he says. “It would be a terribly bad idea.”

This weekend saw an impressive display of Allied fire-power in Libya. France, Great Britain & the US enforced an UN imposed no fly zone over Libyan air space. This was led by over 127 Tomahawk missile strikes aimed at strategic military installations. Military experts look for Col. Muammar Qaddafi to either go into exile or be forcibly removed from power in the next 6 months. This will inevitably lead to troops on the ground to stabilize the situation according to Mike Lyons CBS Military correspondent,we will not get out of Libya without putting troops on the ground there at some point to get security force whether they’re blue helmeted troops — US forces or coalition forces but there will be foreign soldiers stationed in Libya before the year’s out.

This along with the recovery in Japan will continue to apply pressure to the precious metals markets for the remainder of the year. Gold is entering its 10th consecutive quarter of gains at $1,430, while silver is on its 9th consecutive quarter of gains at $36.10. This trend shows no signs of slowing in the next 3 quarters. The Middle-East unrest, Japan’s recovery and ongoing nuclear problems, along with strong demand from emerging middle-classes in China & India continue to drive prices forward.

For the smart investor, precious metals indicate more gains for the remainder of the year. Now is the time to acquire gold & silver in your tangible asset portfolio. If you don’t have one it is still not too late to start one today. The world keeps changing, the dangers are out there, give your over-all portfolio the protection it deserves.

Distraught Woman reacts to the devastation from last weeks earthquake in Japan. via KCStar

Gold dropped 1.5% as part of an over-all retraction in the commodities market. Gold made an 8% gain in the last month continuing it’s decade long bull run. The current retraction in price resulted from a broad sell-off in response to Japans current nuclear crisis.

UBS strategist Edel Tully in a note to CNBC said, It’s not unusual for gold to tumble during initial episodes of a severe broad asset sell-off. Investors sometimes have little choice but to sell the yellow metal to cover margin calls and losses elsewhere before gold then divorces itself from the downtrend. Yet, the big picture on gold shows strong demand continuing as a safe haven investment. Tully went on to add, In the current climate there is more opportunity for gold to rally, as the need for safe havens accelerates.

Japan’s Nikkei dropped 11% overnight on the continuing crisis starting with earthquakes & tsunamis, currently the impending nuclear disaster. We all hope for a speedy recovery in Japan. It seems this crisis along with ongoing turmoil in the Middle East will keep pressure on gold & silver demand for the foreseeable future.